Privity of contract is an important principle of Indian contract act, 1872 that specifies the contractual relation among parties to a contract meaning that the parties who have entered into the contract has the jurisdiction to enforce the contract or to be bound by its terms, be it agreed upon orally or in writing. In simple terms, if it's a third person (the third party) not involved in the agreement, he cannot lay a claim to the benefits of the contract nor can he make himself liable to the contract.
This principle is important under the Indian contract act 1872 so that the contracts remain private between the people who have come to the terms.
For example, if A and B form a contract, suit to enforce the contract or make the contract good against C generally lies in neither one.
However, there are exceptions to the Doctrine of Privity as well. These exceptions grant third parties the ability to make sure that some contracts in some cases are complied.
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Doctrine of Privity of Contract: Meaning
The term privity of contract has not been expressly defined in the Indian Contract Act, 1872 but Section 2(h) gives rise to this doctrine by defining that there shall be two parties to a contract.
Privity of Contract is a doctrine that limits the rights and obligations which flow from a contract strictly to the parties who enter into it. This implies that only the parties to the agreement to whom such rights and duties accrue can attempt to enforce their legal rights and duties.
Once a contract exists, a third party can’t enforce the terms of the contract if they were not parties to the contract. A third party may even receive an agreement that benefits that third party but they lack legal standing to claim those benefits.
For example, A enters into an agreement with B to pay C some fixed amount of money, C being a third party, cannot sue A or B to enforce the payment.
A third party cannot be held liable for fulfilling contractual obligations, which are not covered by such third parties. They ensure that people or entities do not suffer unfairly from agreements to which they did not agree, or in which they were not involved.
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Key Elements of Privity of Contract
Privity of contract could be described as one of the key legal concepts of the contract law specifying the legal connection between the parties to the contract. It determines that only the parties that are party to agreement can assert or be subject to the agreement.
Contractual Relationship: The principle is rather rigid where it applies between two parties who have voluntarily contracted to do business.
Exclusion of Third Parties: It should also be noted that those who did not take part in the formation of the contract have no interest in it.
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Relevant Case Laws related to the Doctrine of Privity of Contract
Several landmark judgments have cemented the application of the doctrine of privity of contract in Indian Contract Act, 1872, these are:
Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915): This is one of the leading English cases that laid down the foundation for privity of contract wherein the court ruled that a third party cannot enforce a contract, even if they benefit from it as there was no consideration provided by them.
Jamna Das v. Ram Autar (1912): The court held that a third party could not enforce a contract unless an exception to the privity rule applied.
M.C. Chacko v. State of Travancore (1970): The Supreme Court of India reiterated the doctrine of privity of Contract by stating that a contract cannot confer rights or impose liabilities on a third party.
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Exceptions to Privity of Contract
While the doctrine appears rigid there are certain exceptions that make it flexible and practical. These exceptions ensure that justice is served in specific circumstances as mentioned below:
1. Beneficiaries under a Trust:
If a contract is made for the benefit of a third party who is a beneficiary under a trust, the beneficiary can enforce the contract.
In Khwaja Muhammad Khan v. Husaini Begum (1910), a contract for marriage expenses was enforced by the beneficiary, despite them not being a party to the contract.
2. Family Arrangements:
In cases of family settlements, third parties can enforce agreements if they are beneficiaries.
For example: A father enters into an agreement with his son to provide a piece of his land for his grandson. The grandson can claim the benefits.
3. Agency Relationships:
An agent can enforce a contract made on the behalf of the principal if the principal authorizes them to do so.
4. Acknowledgement or Estoppel:
If a party acknowledges a third party's rights or obligations under a contract, they cannot deny it afterwards.
5. Contracts with Statutory Authority:
When statutes confer certain benefits on third parties, those third parties can enforce the contract.
For example: Insurance contracts under the Motor Vehicles Act, 1988 allowing third-party beneficiaries to claim compensation.
6. Marriage or Prenuptial Agreements
Agreements made in anticipation of marriage may include provisions that benefit individuals outside the contract, such as children or extended family members.
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Development of Privity of Contract in Indian Courts:
In India, courts have different opinions on whether someone who is not part of a contract can enforce it. There are a number of cases which show that a person who isn’t a party to a contract cannot enforce it, following the rule in Tweddle v. Atkinson (1912), which applies in both India and England.
However, the Indian Contract Act,1872 doesn’t clearly state whether this rule should be followed or not.
The Privy Council applied this rule in India in the case of Jamuna Das v. Pandit Ram Autar Pande in 1912.
Even though Indian courts mostly follow the English rule of privity of contract, there is another view.
This view comes from the Privy Council’s observation in Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum (1910) that in India, especially in communities like Muslims where marriages are often arranged by parents or guardians for minors, strictly applying the common law rule could lead to unfair results. Agreements related to such contracts might need exceptions to the rule.
Some High Courts have used this idea to say that Indian courts don’t always have to follow the rule in Tweddle v. Atkinson (1910). However, the Supreme Court of India has repeatedly supported the rule and applied it in many cases.
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Conclusion
This paper presents the Indian Contract Act, 1872 in asserting that the doctrine of privity of contract remains a crucial tool towards recognizing enforceability of agreements. Despite it being particularly severe with third party rights, the well prescribed exclusions indicate flexibility and balance of the legal process. Therefore, by striking the appropriate balance between the principle and the needs of society, the Indian judiciary has been able to retain the doctrine’s use in furthering justice while not compromising the sanctity of contractual obligations. Doctrine of Privity of Contract and its exceptions are important for anyone involved in administering or working with this field in contracts, as a lawyer, business person, investor or even a party to a particular contract.
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Doctrine Privity of Contract in Indian Contract Act, 1872
Q1. What is the Doctrine of Privity of Contract?
This principle simply guides that only the parties to a contract can call on to perform or even have the capacity to sue on the contract.
Q2. Can a contract be enforced by a third party?
No, but there are some advantages, for example in relation to benefit, trust or agency.
Q3. What are the key exceptions?
Bilateral Contracts that benefit a third party, Trusts, Family Arrangements and Covenants affecting property.
Q4. Provide an example of Privity of Contract.
In contract law if A agrees to pay B for a job to be done by C, C has no remedy in law since they were not a party to the contract.
Q5. What role does the Doctrine of Privity of Contract play?
It protects the interest of the parties by putting the obligation on only those who entered into the particular contract.
